The USA Today reports today that the IRS sent out $1.6 billion in incorrect tax refunds during the 2006 and 2007 tax filing season. The information was released in a recent report from the Treasury Inspector General for Tax Administration (TIGTA). The TIGTA investigation found that the IRS has low-balled their initial estimate of the fraudulent tax refunds in 2006 and 2007 and that the agency has insufficient resources to adequately detect and stop these refunds from being dispersed.

In addition, the IRS made key decisions not to pursue hundreds of thousands of returns they knew to be fraudulent. This is worse than having insufficient resources (or will) to pursue people and corporations who don't pay all the taxes they owe - it's knowingly sending out federal resources to those who don't deserve the money in the first place. From the TIGTA report:

The CI [Criminal Investigations] Division and Examinations functions agreed to limit the number of fraudulent return referrals to ensure that examination resources were available to address other areas that are also critical to compliance enforcement. Therefore, the CI Division focused on identifying those returns with higher dollar values and higher data-mining scores, which precluded more than 500,000 potentially fraudulent returns from entering the Centers' screening process. Had these returns been included, we estimated that the Centers would have identified an additional potential $742 million in fraudulent refunds.

Obviously, more resources at the IRS would help a great deal - something we've argued repeatedly this year. Yet there are a few quotes in the USA Today article from IRS officials which had me scratching my head. This one in particular:

Many suspicious returns involve small sums and would produce a "relatively low dollar return" if the agency pursued deep investigations of each one, said IRS spokesman Terry Lemons, adding that the result would be a "loss for the nation's taxpayers."

So if I'm reading this right, the IRS is okay with sending out refunds to people who don't deserve it so long as those amounts are small, because trying to prevent that would end up costing more money than it saves? Yet the IRS (and many misguided legislators in Congress) are perfectly happy to continue a private tax collection program to pursue people who owe small amounts of back taxes despite overwhelming evidence that this outsourcing program costs more money than it brings in.

Wonder if that could have anything to do with the fact that the private tax collection program benefits private companies? And that those private companies are based in two locations with powerful leaders in Congress who not only originally drafted the program into law, but continue to support it? Hmmm...